22:27
In 2006, Steve Jobs approached Intel CEO Paul Otellini with an offer. Intel would produce the chips for Apple's upcoming product, the iPhone. But, Intel refused. Of course, we know the rest of the story. But, why did Intel say no? And what did they do when they realized the scale of their mistake? What's even more interesting is the company that replaced Intel that now rules not just smartphones, but the entire tech and doesn't have to manufacture anything. To understand this meeting and this entire story, we have to look at Intel CEO Paul Otellini. By pretty much all accounts, a good CEO. He didn't yell and scream. He never dictated. He never asked me to come in on a Sunday. He
never asked me to stay late on a Friday. But, he had his way of getting you to rise to the occasion. Intel generated more revenue during his 8-year tenure as CEO than it did during the rest of the company's 45-year history. Of course, he was inheriting tech's golden goose, Intel, and inflation plays a part here. But, he had been a wildly successful in making a profit machine. Tuning the machine that is Intel happened very well under his watch. They've grown revenues a ton and margins are higher than they used to be. And that word is the key to this story, margins. Intel's president after Paul Otellini, Renee James, said, "He's a super low-key guy. He's not a Steve
Jobs. He's not a Bill Gates. But, his contribution has been just as big." And speaking of Steve Jobs, Apple and Intel were on about as good terms as you could get. They would be developing and supplying the new Core x86 chips for Macs. To Steve Jobs, Intel seemed like the perfect fit for their next big product, the iPhone. So, he approached Intel with another proposition. They would manufacture chips for this new product. But, what he might not have expected was the reply. Intel was totally uninterested in mobile. And around this time, they made another big decision. Intel had a product called XScale specializing in mobile chips.
Little did Intel know, this could have been a golden ticket for the future. But, there was a problem. They'd been pouring money into XScale for almost 10 years. They had spent over 10 billion dollars and nothing much came of it. Palm Trios, pocket PCs from Compaq, MP3 players, a few hits, but mostly duds. Compared to the PC x86 chips, there was a big difference between the two. Margins. On average, Intel's chips cost $40 to produce, but the x86 chips would sell for hundreds of dollars. But, that didn't work for mobile devices, which had a selling price lower than these x86 chips. Intel could only sell these for less than 100. Intel wasn't exactly beating down Apple's door to supply it
with a few million $30 ARM chips that would cost it many millions to develop and manufacture. Paul turned down Apple. Not only that, in June 2006, it sold XScale to Marvell Technology Group and redeployed about 16,000 employees. They were pulling out of mobile. It just didn't seem worth it. That and no one really foresaw how big the iPhone would become. The thing you have to remember is that this was before the iPhone was introduced and then no one knew what the iPhone would do. At the end of the day, there was a chip that they were interested in that they wanted to pay a certain price for and not an equal more. And that price was below our forecasted cost. I couldn't see it. It wasn't one
of those things you can make up on volume. And in hindsight, the forecasted cost was wrong and the volume was 100x what anyone thought. To make matters worse, deep down, Paul knew this was the wrong move. On paper, it made sense. The margins were awful and they had just sold off their mobile product family. So many times in my career, I've ended up making decisions with my gut and I should have followed my gut. My gut told me to say yes. And oh boy, was his gut right. But, if not Intel, who did Apple go with for their iPhone? Well, it's a bit ironic. Without knowing it, Intel had created their own nightmare. But, unfortunately, modern tech today is also a nightmare.
Everything you do isn't just tracked, but sold. Most of us think, "Yeah, I get it. Zuckerberg is watching me." But, we forget the worst players in the pipeline, your internet service provider. They can literally see everything, not just the websites, but how long you spend, what you search, even your smart device behavior. Government studies have proven this and even though they promised they won't sell your data, they use a sneaky trick to transfer it to others to be monetized by them. But, it doesn't have to be this way. Stick it to your ISP with ProtonVPN. Proton masks your IP address and connection to stop your ISP from tracking you and knowing what you're up to. ProtonVPN has a strict no-logs
policy. They keep nothing on you, which is verified by independent auditors. Plus, they're Europe-based and operate outside US jurisdiction, allowing them to uphold strict privacy standards. But, not only is it more private, ProtonVPN is just a better web experience. It has an integrated ad blocker and it lets you access regionally blocked content like streaming services and news articles. And you can still watch shows, movies, and sports in 4K without buffering. And their high-speed server network offers speeds up to 10 GB per second. That's insanely fast. Many streaming sites are beginning to catch on to VPNs, though not Proton. It has a stealth function, which disguises your VPN connection,
making it especially hard to block. ProtonVPN has over 20,000 servers in over 140 countries and supports all major devices, even Apple TV or Fire TV. Click the link below to protect your privacy. Try ProtonVPN today and stick it to your ISP using my link. protonvpn.com/logicallyanswered It comes with up to a 70% discount. Thank you to Proton for sponsoring our video. Apple soon turned to Samsung to produce their chips. Funny, right? iPhone chips being produced by Samsung. But, that's not the important part.
Samsung wasn't designing them. They would just manufacture the chips. The real powerhouse was a company called ARM Holdings and this company is key, not only to this story, but to the entire world of mobile. ARM would soon become Intel's biggest rival. But first, some context. ARM Holdings, the British company, owns the license to the ARM chip architecture. ARM chips weren't powerful, but they were cheap, generated less heat, and used less power. Excellent for battery-powered devices. ARM chips were everywhere, in practically every mobile phone and tablet, and even the Game Boy. Not because they were the fastest, but because they were the best fit. The original deal with Intel would have been
to produce ARM-based chips because ARM doesn't make anything themselves. They own the license to the ARM architecture. So, whenever companies like Qualcomm, Samsung, or Apple use their architecture, ARM gets a cut of every chip shipped. Billions of them. ARM is more a royalties collection company than a chip company. But, the strangest part is that ARM was co-founded by Apple in a partnership with Acorn. Apple wanted a new chip architecture for the MessagePad in 1994. And it wasn't successful. Then, when Apple was near bankruptcy, Jobs sold their stake in ARM to stay alive. Then, the ARM architecture took off thanks to Nokia and was now dominating the entire mobile industry. So, the first iPhone
had ARM chips produced by Samsung and of course, it was a wild success. But, Apple had a problem. At this point, they didn't have an in-house custom chip team. They had actually laid them off in 2005. So, their work with Samsung wasn't the best. Not having their own chip design experts in-house made for very poor communication with Samsung, which is why the A1 processor in the iPhone wasn't quite what they wanted, although it was exactly what they'd asked for. In other words, mostly Apple's fault, not Samsung's. So, they formed a new team and began designing their own chips. iPhones got better and better, but they were still using ARM architecture, which means still paying a license to ARM Holdings. Around this time, Intel began
to wake up. They saw how big the iPhone was and now how massive smartphones were. More expensive phones meant potentially better margins, but most of all, huge scale. The volume was 100x what anyone thought. Smartphones and tablets were exploding. But, PCs were starting to slow down in those core market. So, Intel thought maybe it's not too late. Intel and in particular Paolo Dell'Erba really wanted to get back in the game, but they wanted to use x86, the architecture used by basically the whole computing world in PCs. But, there was a problem.
ARM was simply better for mobile. It was far more power efficient. If Intel could introduce a type of x86 chip to mobile and make it less power hungry, the software could be compatible with PCs. They could dominate mobile, tablets, PCs, notebooks, everything. So, in 2008, Intel built something new. Atom. It was x86, but extremely compact and energy efficient. And Intel was making huge strides, just like ARM. But, Intel had a lot of work to do to win customers over. In particular, Apple. ARM and Intel are on a collision course. What happens next could determine the shape of the computing industry for years to come.
Stories like these shape the history of tech, yet many people don't know they exist. Business is full of crazy decisions and fascinating stories, and you can learn a lot from them. We post these kinds of stories all the time. So, subscribe. We're almost at a million and it would mean the world. Intel was ready for war. They made a deal with TSMC to allow customers to make their own products based on Atom cores. And Intel had something else going for it. It's absurdly deep pockets. Atom doesn't have to be an overnight success in the device market, as long as Intel can prop it up with sales from its lucrative PC and server lines.
ARM employs fewer than 1,800 people, and at $3 billion, its market capitalization is a mere fraction of Intel's. But, there was a problem. Intel forgot what the market actually needed. x86 wasn't really a good fit for mobile. No one cared about compatibility with PCs. What the market really needed was ultra-low power, cheap mobile chips. Chips you can make tons of and quickly. Billions of them.
Atom wasn't that. Well, sort of. Atom could have matched ARM on power consumption and even beat some models. The bigger problem was low-power, integrated, and most of all, cheap chips. Intel's business was built around high-margin chips, chips they made themselves in a very specific environment. They control the architecture, design, manufacturing, and the process technology. Great for PCs, but mobile needed cheap chips. ARM had designed chips and used Samsung and TSMC to make them faster and cheaper than Intel could. In 2003, Intel shipped its billionth x86 chip after being in the game for decades. But, in 2009, in the midst of
the fight for mobile, ARM shipped 2.8 billion processors in just 1 year. Plus, there were plenty more problems. Intel's process technology leadership couldn't save the company's mobile division because it wasn't designed to do so. Smartphone and the tablet OEMs wanted devices with integrated LTE radios. Intel didn't have them. Even the Sofia partnership with the TSMC never came to market, apparently because Intel couldn't secure enough volume to kickstart production. Intel was trying to push x86 into mobile, and not only did it not fit, they couldn't keep up with ARM chips. Despite a promising start, Atom and Intel's entire mobile division was collapsing. The winner was ARM. And in a very ironic turn of events,
Apple wasn't interested in Intel's [clears throat] Atom. After Samsung, they had seen the power of ARM and in particular designing their own chips, aka Apple silicon. Tim Cook even said Apple has a long-term strategy of owning and controlling the primary technologies behind the products we make. About a decade later, Apple dropped Intel x86 from their Macs, too. And guess which architecture they switched to? That's right. Intel had lost and ARM had won. And unlike Intel, ARM didn't even make a damn chip. If Intel had said yes all those years ago, they might be a major mobile player today, though not in x86, in the ARM architecture.
I don't think they could have ever replaced that ecosystem, but they could have still been a part of it. And now, they're moving into producing ARM chips for others, just almost 20 years too late. But, I do feel bad for Paolo. He seems like a good leader who made one wrong decision. Unfortunately, an extremely important one. To quote Paolo one last time, at the end of the day, the best transistors win, no matter what you're building, a server or a phone. Today, nearly every phone and the tablet uses ARM processors. Apple products, phones, tablets, notebooks, Chromebooks, all run on ARM architecture. To be fair, nobody realized how massive the iPhone would be. Some of the most
successful people on Earth scoffed at it. Paolo isn't the only one who lacks some foresight. I mean, even Steve Jobs sold Apple's stake in ARM. But, if you ever have any regrets, at least you didn't turn down the iPhone. AMD has a similar story of missteps in the past. But now, they're doing better than ever. Check out this video to learn more. But until then, I'm Harry, and I'll see you guys on the next one.
